When to sell a Bad IP

[GoAnna!]

Rent seems to be tracking inflation, wages and costs pretty well.

It's not renters fault their landlords bid up houses in a speculative bubble.

You graph shows rent as a decreasing proportion of income and hence increasingly more affordable. This makes the current rent "catchup" situation quite understandable as it will pull rents back into line.

 

[devo76]

Hi guys,

I'm curious to know how many of you have sold a bad IP/or are considering selling a bad IP/ or are there no bad IP's!

In these hard times, I am considering, well more likely - will be forced to sell an IP that is costing me the earth to hold. It is setting me back 30k a year and that is at today's IR.

I do not think I will see any growth in it for maybe 3yrs, and spoke to a R/E Agent yest, who informed me he thought it had lost 20k in value.

Therefore I will have lost 110k in 3 years. Now unless the market bounces back to 30% Growth in Yr 4, I stand to lose alot of money.

Yes, I know all about buy and Hold etc, but I have read many times, and Jan Somer's also says, that sometimes you just have to bite the bullet and get rid of a bad IP.

Anyone else?

Regards Jo

I have considered this also. I purchased my first IP 1 year ago in my local area( south coast NSW). The market had been flat for 3 years so i thought it would be a good time to buy.The market has since dropped more with the API magazine stats showing the area has dropped a further 14%.I believe my property not to be this bad as i purchased well but the worst case cenario must be considered.

I considered selling but chose not to.
I have a 7% IO loan locked for another 4 years.
With tax return it is only slightly negative at around $50 pw

So my circumstances allow me to keep it. Plus my area historically has large periods of slow growth then a large upswing to catch up at the top of the cycle. This has happened for the last 40 years.IF history repeats i should see some growth before my holding costs possibly change.

I believe my situation to be not that bad and therefore holding is the best. If yours is worse then i would definately do the maths and decide from that.

Cheers.

 

[scamp]

Sell out in the middle of a slump? I wouldn't do it if I were in your situation.

If you were in his situation you would not have a choice.

The only real advice would be :
Sell out now, take the loss. See it as an expensive lesson.

 

[JamesGG]

Hiya,

First of all, history is history and not relevant now. That said, you have a property that is a problem, for you, today. There are always numerous options; it's not just a matter of keeping it and continue wearing the losses, or sell it. What are some other possible solutions..?

• Is it near enough to a university that student accommodation could be an option, in order to increase the yeild...?
  
  Can the property be subdivided...?
  
  Is there potential to increase rent and / or value by improving the property (ie, a reno / redecoration / new fence, aircon, etc)...?
  
  If the property is suitable, does the area zoning allow for it to be used as a semi-commercial building, such as childcare or medical suites...?
  
  If not, would it be worthwhile applying to council for same...?
  
  Is offering existing (or potential) tenants a lease option or vendor finance worth looking into...?
  
  Hell, is it even rented at - or slightly above - market value...?

If these things aren't really possible or desirable for one reason or another, but you want to hold the IP for future growth rather than buy a different one, maybe there are other ways to change your circumstances to make the ongoing losses hurt a little less...?

• Whilst exit fees will hurt, are you sure refinancing your portfolio won't put you in front, especially if those costs can be absorbed by equity somewhere...? A lower interest rate over a high amount of borrowings may make some sort of a difference. Maybe talk to one of the helpful resident brokers...?
  
  I presume you have a ITWV in place to help with cashflow...? And depreciation schedules drawn up if appropriate...?
  
  Is a LOC a possibility; ie, pay interest with equity (even if that equity comes from elsewhere in your portfolio)...?

And after all that, I have no idea if any of those ideas are helpful or not. Hopefully though, it's at least got you thinking about what can be done to make the scenario a little happier for you

Cheers

James.

 

[josko]

If you were in his situation you would not have a choice.

The only real advice would be :
Sell out now, take the loss. See it as an expensive lesson.

Exactly.

I am well prepared to learn a little leason than a rather huge one if I keep it!

Aimjoy: Yes, bad financing, but I am happy with the property i bought as a result.

James,

Thanks for the options, but I either have none of them available to me / have a fantastic broker , or I've tried and died. I have even tried Buy to Own at a very good price - with a deal I thought would work but to no avail!

Reluctantly, I have put it on the market!

Interesting though that no-one has said that they have made a bad Investment.

I actually think I made a bad choice with one of my first IP which I bought OTP to make a fast buck. Or so I thought at the time. I have actually sold it because it cost WAY too much to hold, even in a buoyant market - and made a whopping 40k! Woo Hoo! I had all these ideas I would make 100k! That was a learning kerb!

Thanks for all your input guys.

Regards Jo

 

[GoAnna!]

Jo

I do think there are bad ips - some just never give enough in either rent or capital growth to make the whole exercise worthwhile. Some are fine in themselves but the timing of the purchase in relation to the growth cycle and interest rates makes them a bad deal. The property is only part of the package. If holding it is costing you serious financial pain then you need to be clear how and when that will be repaid.

My first ip was a "bad ip" ie bad investment because I bought it negatively geared at the beginning of a long period of zero growth. It was a painful lesson. If I had waited until properties actually began to rise I would have had such a larger deposit / lower holding costs had I saved all that holding money.

Another increased capital growth wise for a while and then went bckwards. It did not cost me to hold but it did mean that I lost opportunities - I could have made so much more money with my investment.

 

[joeExpat]

A year or 2 from now, you'd be kicking yourself once the market recovers and your "bad IP" returns all of your losses plus more.

I think we've all been spoilt by the uninterrupted boom of the last 7 years. The market is bound to stagnate for a few months whilst the credit squeeze works itself out.

stagnate for a few months ? that's optimistic.
I reckon more likely trend downward for several years before any stagnation occurs.
Ipso facto... at the moment just about every IP is a 'bad IP'

 

[steveadl]

stagnate for a few months ? that's optimistic.
I reckon more likely trend downward for several years before any stagnation occurs.
Ipso facto... at the moment just about every IP is a 'bad IP'

Why would you make such a sweeping statment?? At any point in time, there are always properties experienceing good growth, even during downturns.

 

[Nullagine]

Graph reading:

1. Real household incomes have been increasing.
2. Real rents have increased more slowly than household incomes.
3. Real house prices have increased much more rapidly than household incomes.
4. Real construction costs have been increasing at close to the same rate as household incomes.

Reading between the (graph) lines;
1. Real price of housing has increased more rapidly than building costs.
2. Real cost of land and taxes, not building, has increased more rapidly than household incomes.
3. Rents have been suppressed by excess supply of rental housing.

No one knows the future. In so far as lower interet rates have resulted in higher land prices, higher interest rates imply lower land and, therefore, lower housing prices.

 

[redsquash]

In these hard times, I am considering, well more likely - will be forced to sell an IP that is costing me the earth to hold. It is setting me back 30k a year and that is at today's IR.

IS that before you do your tax return?

I do not think I will see any growth in it for maybe 3yrs, and spoke to a R/E Agent yest, who informed me he thought it had lost 20k in value.

Therefore I will have lost 110k in 3 years.

Are you going to now throw 3years away?Why have you waited 3 years? You must have thought it was a reasonable property to keep holding.If someone said you are at the bottom of the market in your area would you then hold?


Now unless the market bounces back to 30% Growth in Yr 4, I stand to lose alot of money.
What growth do you expect in year 4? The agent may just be baiting you to sell.Have you had only 1 opinion?

Yes, I know all about buy and Hold etc, but I have read many times, and Jan Somer's also says, that sometimes you just have to bite the bullet and get rid of a bad IP.

Anyone else?

Regards Jo

Whats your Internal rate of return, and how did you calculate it. What software package? I suspect you may have excluded some figures
A 10 % return is fine, though far from great. With a 95 % loan of course you will be massively geared.
How much was your loan?

I agree .........shoot the bad dog.... but you have a lot of assertions in your post which I worry about

 

[Andrew_A]

Wow, this thread sets a new record for most ignored posts from my ignore list, some quality contributions I'm likely passing on here I estimate.

Josko one perspective is to imagine you are 100% in cash at the moment, would you consider your IP to be a decent choice for your cash presently? Transaction costs are an issue but likely not the most significant ones perhaps.

 

[Punchy]

stagnate for a few months ? that's optimistic.
at the moment just about every IP is a 'bad IP'

Joe - That's a blanket statement that helps no-one.

IP's bought start / before the boom / bubble and correctly financed will do fine. However those that bought late in the boom/bubble and are highly leveraged.......

 

[joeExpat]

Joe - That's a blanket statement that helps no-one.

IP's bought start / before the boom / bubble and correctly financed will do fine. However those that bought late in the boom/bubble and are highly leveraged.......

I did say 'at the moment' meaning short term.
My IPs cost me about -1% to hold even on 40% LVR and I reckon are decreasing in value by at least that amount also, 'at the moment', even if they've made big gains in the past.